Welcome to the new "Tax & Money Stuff" column, a partnership with Hannah Cole. Hannah is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to her. She is the founder of Sunlight Tax. Read her post about saving for retirement here.

You’ve dreamed of quitting your job and striking out on your own. You’ve gathered some clients, or sold some artwork, and suddenly this year, you’re making some real money. But then you hit a speedbump. You file your taxes this year and discover that you owe money - a lot of money - that you didn’t expect to owe. Uh oh. This is a rude surprise that many freelancers encounter when starting out. The good news is, you’re making money. But the bad news is that anytime you make money, the government wants its share. And for a lot of freelancers, that share is a lot bigger than they realized.

Here’s why.

Self Employment Tax, Explained

Our tax system is “pay as you go.” Everyone is supposed to pay taxes all year long, as they earn income. When you work as an employee, your employer takes care of the logistics for you - they withhold 7.65% from your paycheck for Social Security and Medicare (also known as FICA). In other words, you are paying the Federal government 7.65% of your paycheck towards Social Security and Medicare, but you don’t have to think about it. In addition, your employer pays, out of their own pocket, another 7.65% towards Social Security and Medicare, on your behalf. This is called “payroll tax.” If you’ve ever wondered why so many businesses try to pay people as contractors (reported on a 1099) and not as employees (reported on a W2) - this is the reason. It automatically costs them 7.65% extra to treat you as an employee. (And it is fair and contributes to a healthy society, if I may say so).

Now what happens when you work for yourself? First, there is no payroll department taking care of this stuff for you. You have to figure it out yourself. You must pay the government the same 7.65% of your income toward Social Security and Medicare that you would have as an employee. However, since you are also the employer now, you also have to pay the second half of the Social Security/Medicare equation.

Two sides of the FICA equation

Except now, instead of calling it “payroll tax” you call it “self-employment tax.” You pay a full 15.3% of your income (that’s 7.65 + 7.65) towards Social Security and Medicare, because you are both an employee and an employer. Those are the broad strokes of self-employment tax. If you’re not a details person, you can stop here, and just remember that about 15% of your freelance income must be set aside for Social Security and Medicare. If you’re up for another detail, then read the twist in the footnote.*

When you’re self-employed, you’re going to pay this 15.3% on your net income, regardless of how much income that is. But it’s important to note that your income tax is over and above this amount. Your income tax is a percentage of your taxable income (that is, your net income after taking certain deductions), based on your tax bracket. So keep in mind that setting aside 15.3% of your self-employment income isn’t enough. You’ll need to put aside enough to cover both your self-employment tax and your income tax. Now that I’ve explained what self-employment tax is, I’ll be covering strategies for putting enough money aside for your taxes in an upcoming post.

So back to you and your new freelance income. If you aren’t expecting it, the first year’s tax bill can be brutal. In my tax practice, I see a lot of freelancers after their first year making a decent income from self-employment, who are blindsided by how much tax they owe. And generally, the reason for their surprise is that while they were expecting the income tax part, they didn’t account for the self-employment tax. This is where estimated quarterly taxes come in. They take the sting out of the April tax bill, and become obligatory by law once you have a large enough tax obligation. Stay tuned for those details in the next post.

*Here’s the twist: When you are self-employed, one half of your Social Security/Medicare tax (7.65%) is tax-deductible. So you actually pay one of your halves on 92.35% of your income (100% - 7.65% = 92.35%), and the other half on 100%. A little tricky, but it’s a deduction that works in your favor.

Disclaimer: This is meant as a guide, not professional advice. If you have questions about your own situation, talk to a tax professional.

January 31st is the last day to get The Ultimate, Honest Guide to Understanding Artist Taxes on sale for 20% off! Use the link in profile to get the discount! The Ultimate, Honest Guide to Understanding Artist Taxes will teach you: How to overcome the fear that prevents many artists from getting all of the tax benefits they could be entitled to; What your tax responsibilities are as an artist; The concept of the Schedule C: what it’s for and why you should use it; Whether filing your taxes as a business is appropriate for your arts practice; The difference between hobby vs. business rules and why they are a pitfall for artists plus much more! #artisttaxes #taxesforartists #sulighttax #hannahcole #delveart #artistempowerment #creativebusiness #creativeentrepreneur

This Friday in Brooklyn! Back by popular demand! Hannah will be back in town to give her super-informative tax workshop. Come learn: What can I deduct? Do I bring receipts to my accountant? Is my art a business or a hobby? What is a Schedule C? How do I deduct my home studio? Hannah Cole is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to Hannah. She will discuss the basic tax equation, self employment tax and the estimated quarterly tax system, audit concerns for the working artist, and other tax issues specifically relevant to artists, followed by a question and answer period. Hannah Cole is the founder of Sunlight Tax, which specializes in friendly, informative tax preparation for artists, and engaging, art-world savvy tax education workshops for artist groups. Link in profile to sign up! #taxesforartists #taxworkshop #sunlighttax #creativeentrepreneurs #creativebusiness #artsgowanus #hannahcole

Just because it's good to re-read this letter every once in a while...
Sol LeWitt writing to Eva Hesse in 1965:
"Dear Eva,
It will be almost a month since you wrote to me and you have possibly forgotten your state of mind (I doubt it though). You seem the same as always, and being you, hate every minute of it. Don’t! Learn to say “Fuck You” to the world once in a while. You have every right to. Just stop thinking, worrying, looking over your shoulder, wondering, doubting, fearing, hurting, hoping for some easy way out, struggling, grasping, confusing, itching, scratching, mumbling, bumbling, grumbling, humbling, stumbling, numbling, rambling, gambling, tumbling, scumbling, scrambling, hitching, hatching, bitching, moaning, groaning, honing, boning, horse-shitting, hair-splitting, nit-picking, piss-trickling, nose sticking, ass-gouging, eyeball-poking, finger-pointing, alleyway-sneaking, long waiting, small stepping, evil-eyeing, back-scratching, searching, perching, besmirching, grinding, grinding, grinding away at yourself. Stop it and just
DO"
#justdo #lettertoevahesse #sollewitt #evahesse #inspirationforartists

You might be wondering how the new tax legislation affects you as an artist/freelancer. @hannah.cole.painter of Sunlight Tax breaks it down for you in a FREE 15 minute video. Empower, educate and protect yourself! Link in profile to full video. #artistshelpingartists

If you have asked yourself any of these questions, you should join us in Brooklyn next Friday to get the answers! Hannah Cole is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to Hannah. She will discuss the basic tax equation, self employment tax and the estimated quarterly tax system, audit concerns for the working artist, and other tax issues specifically relevant to artists, followed by a question and answer period. Hannah Cole is the founder of Sunlight Tax, which specializes in friendly, informative tax preparation for artists, and engaging, art-world savvy tax education workshops for artist groups. Link in profile for more info and to sign up! #taxesforartists #taxworkshop #creativeentrepreneur #creativebusiness #artbusiness #professionalpractice #sunlighttax #hannahcole @hannah.cole.painter

Beautiful show at Morgan Lehman’s new 2nd Gallery. #ericaprince and #osamukobayashi Also, don’t forget to sign up for the Taxes for Artists workshop with Hannah Cole happening in Brooklyn on January 26th! Link in profile. #artisttaxes #artistempowerment #creativeentrpreneur #creativebusiness #taxworkshop #taxseason #sunlighttax

Back by popular demand! Hannah will be back in town to give her super-informative tax workshop. Come learn! What can I deduct? Do I bring receipts to my accountant? Is my art a business or a hobby? What is a Schedule C? How do I deduct my home studio? Hannah Cole is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to Hannah. She will discuss the basic tax equation, self employment tax and the estimated quarterly tax system, audit concerns for the working artist, and other tax issues specifically relevant to artists, followed by a question and answer period. Hannah Cole is the founder of Sunlight Tax, which specializes in friendly, informative tax preparation for artists, and engaging, art-world savvy tax education workshops for artist groups. To register, click link in profile. #taxesforartists #sunlighttax #taxseason #taxworkshop #creativebusiness #creativeentrpreneur #artistempowerment

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